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This dissertation contains three essays on monetary policy, dynamics of the interest rates and spillovers across economies. In the first essay I examine the effects of monetary policy and its interaction with financial regulation within a micro-founded macroeconometric framework for a closed economy with a heterogeneous banking system, facing a period of low interest rates. I analyse the interplay between monetary policy and banking regulation and study the role of agents’ expectations for the effectiveness of unconventional monetary policy tools. In the next essay, I argue that openness is crucial for understanding the dynamics of the term structure. In an empirical application, I show that my model of the term structure fits well the yield curve in-sample and has a sound ability to forecast interest rates out-of-sample. The model accounts for the expectations hypothesis, replicates the forward premium anomaly and reconciles the uncovered interest rate parity implications. The last essay is concerned with the dynamics of co-movement among macroeconomic aggregates and the degree of convergence or decoupling amongst economies. The model includes measures of financial and trade-based interdependencies and incorporates feedback between macroeconomic variables and time-varying weights. The findings point at the importance of asset price movements and financial linkages.
This thesis consists of four chapters. Each chapter covers a topic in international macroeconomics and monetary policy. The first chapter investigates the impact of unexpected monetary policy shocks on exchange rates in a multi-country econometric model. The second chapter examines the linkage between macroeconomic fundamentals and exchange rates through the monetary policy expectation channel. The third chapter focuses on the international transmission of bank and corporate distress. The last chapter unfolds the interest rate channel of monetary policy transmission in-an emerging economy-China, where regulations and market forces co-exist in this transmission.
The recent financial crisis has highlighted the limits of the “originate to distribute” model of banking, but its nexus with the macroeconomy and monetary policy remains unexplored. I build a DSGE model with banks (along the lines of Holmström and Tirole [28] and Parlour and Plantin [39] and examine its properties with and without active secondary markets for credit risk transfer. The possibility of transferring credit reduces the impact of liquidity shocks on bank balance sheets, but also reduces the bank incentive to monitor. As a result, secondary markets allow to release bank capital and exacerbate the effect of productivity and other macroeconomic shocks on output and inflation. By offering a possibility of capital recycling and by reducing bank monitoring, secondary credit markets in general equilibrium allow banks to take on more risk. Keywords: Credit Risk Transfer , Dual Moral Hazard , Monetary Policy , Liquidity , Welfare JEL Classification: E3, E5, G3 First Draft: December 2009, This Draft: September 2010
Opting out of the great inflation: German monetary policy after the break down of Bretton Woods
(2009)
During the turbulent 1970s and 1980s the Bundesbank established an outstanding reputation in the world of central banking. Germany achieved a high degree of domestic stability and provided safe haven for investors in times of turmoil in the international financial system. Eventually the Bundesbank provided the role model for the European Central Bank. Hence, we examine an episode of lasting importance in European monetary history. The purpose of this paper is to highlight how the Bundesbank monetary policy strategy contributed to this success. We analyze the strategy as it was conceived, communicated and refined by the Bundesbank itself. We propose a theoretical framework (following Söderström, 2005) where monetary targeting is interpreted, first and foremost, as a commitment device. In our setting, a monetary target helps anchoring inflation and inflation expectations. We derive an interest rate rule and show empirically that it approximates the way the Bundesbank conducted monetary policy over the period 1975-1998. We compare the Bundesbank´s monetary policy rule with those of the FED and of the Bank of England. We find that the Bundesbank´s policy reaction function was characterized by strong persistence of policy rates as well as a strong response to deviations of inflation from target and to the activity growth gap. In contrast, the response to the level of the output gap was not significant. In our empirical analysis we use real-time data, as available to policy-makers at the time. JEL Classification: E31, E32, E41, E52, E58